From Russ Fox, E.A., of Clayton Financial and Tax of Las Vegas, NV & Bethesda, MD. All of the items below are for information only and are not meant as tax advice. Please consult your own tax advisor to see how each item impacts your own situation.

Archive for the ‘Payroll Taxes’ Category

If you want to go to prison for tax evasion, there’s an easy method: Withhold payroll taxes and don’t remit them to the IRS or your state tax agency. The government investigates all such actions (or should I say inactions). One New York businessman will likely have some time to think that over.

This is a good time to point out that if you are a business owner, you should check to make sure your payroll taxes are being sent to the IRS. You can do so by using EFTPS. You’re personally liable for those taxes, so it’s worth verifying the money makes its way where it belongs. If you use employee leasing (a PEO), you can’t verify this by EFTPS so you will need to find a different method of doing so.

“It amazes me that people who withhold payroll taxes and don’t remit them to the IRS can get away with it.” That’s what my friend, Scott Harker, EA, said to me this morning. Yet time and again I read stories where someone decides to abscond with payroll taxes meant for the IRS. It only works until you get caught, and you’re almost always caught.

It turns out that the campaign finance crimes were small in dollars in comparison to his payroll tax crimes. From mid-2009 through 2011, Mr. Danielczyk didn’t send $2,232,781 to the IRS from employee tax withholdings. He also didn’t send employees’ contributions to 401(k) retirement plans to the custodians; that loss was $186,263. Even after he was indicted for the campaign finance law violations he continued with this scheme! That’s chutzpah.

According to court records, instead of paying Innovative’s employment taxes and pension plan contributions, Danielczyk made a variety of purchases from company accounts. Those purchases included $505,871 for the use of an executive suite in the FedEx Field football stadium in Landover, Maryland, along with $40,000 to sponsor the Virginia Gold Cup, a series of Steeple Chase horse races held in northern Virginia.

Mr. Danielczyk was sentenced to eighteen months at ClubFed, three years of supervised release, and must make restitution of $1.6 million to the IRS.

A hint to anyone who wants to try robbing from payroll withholding: Don’t do it! The IRS investigates 100% of these violations. And it’s a certainty that such malefactions will be discovered–sooner or later (likely sooner) someone will be claiming the withheld payroll tax and the IRS won’t match it (as you took it).

If you’re an employer, this is a reminder that you should use EFTPS to verify that your payroll tax withholding has made it to the IRS. If you use employee leasing (aka PEOs), you have to find another method to verify the withholdings but you should do so. Paying payroll tax once is bad enough; paying it twice is really bad.

Most payroll services are reputable. They help companies comply with the myriad of laws and regulations in payroll by preparing payroll checks, paperwork, and even sending the withheld payroll taxes to the IRS and state tax agencies.

The stories read horribly, with some owners having to take out loans, and other firms perhaps going out of business. Yet there’s a way today to make sure your payroll tax company is remitting your taxes: EFTPS. It takes about two weeks to enroll (passwords will be mailed to you). Once you are enrolled, you can see your payroll tax remittances. There’s no reason to be a recurring victim of this kind of theft.

PEOs that file taxes under their own names and ID numbers have a hidden danger: their clients can’t verify that the IRS has received their payments via the Electronic Federal Tax Payment System (EFTPS). Employers can use EFTPS to monitor payments when they use a payroll service that reports employee taxes under the employer’s own name and Tax ID number. This makes it necessary for taxpayers to investigate PEO-type providers very carefully before trusting them with payroll services. If your payroll taxes are stolen by your payroll provider, the IRS will come after you to collect. Not many employers can afford to pay payroll taxes twice. [emphasis in original]

As noted by Joe and Ann-Margaret Johnston (in a comment to my post), you can’t check PEO tax payments. This means that if you use an unscrupulous PEO, you’re out of luck; the IRS can come after you for the unpaid payroll taxes.

Does this mean you shouldn’t use a PEO? Of course not; there are many PEOs that are well-run. It does mean that you need to be very, very careful using a PEO; you need to check references; you may want to get periodic copies of payroll tax deposits made for your “employees.” Other than that, there aren’t many reliable solutions to this dilemma.

Arthur Weiss had a successful business running various professional employer organizations (PEOs). For a fee, his business would pay employees, remit taxes to the IRS and states, file tax returns, and provide workers compensation insurance. It turns out his fee was slightly larger than advertised.

Mr. Weiss did take in all the money, and he did pay employees. It was was the remitting of payroll taxes to the government that he didn’t like to do. Instead, he lived the good life enjoying jewelry, Ferraris, Lamborghinis, and Porsches. The amount of payroll taxes not remitted to just the IRS was over $4 million.

But that’s not all! The workers compensation premiums also lined Mr. Weiss’ pockets, so employees who got hurt weren’t covered (nor were employers).

But there’s more! Mr. Weiss decided to commit insurance fraud. He reported four pieces of jewelry worth $177,480 lost or stolen. They were found during a search of his former home. Oops….

Like a bad informercial, there’s yet even one more crime: bank fraud. Mr. Weiss decided to get some loans. Instead of showing the tax returns he submitted to the IRS, he made up new returns which, of course, showed more income than he reported.

This brings up the key point of this case: If you use an outside payroll company, you must make sure they remit your payroll taxes. For the IRS, there’s an easy way to do this. Simply enroll in EFTPS, and you can verify that the payroll deposits are being made. “Trust but verify” is a good motto when dealing with payroll. Why is this important? Because paying payroll taxes is bad enough the first time; to have to pay them twice is very bad. Yet if your payroll company does what Mr. Weiss did (abscond with the payroll deposits), that’s what will happen to you. A one-time registration followed by periodic checking up which takes just a few seconds can prevent this.

According to the Department of Justice, Mr. Gottesman allegedly created a sub account within his attorney trust account after he had a tax lien filed against him in 2002. That account was for his wife…but his wife supposedly wasn’t a client. Then he allegedly ran all his expenses — both personal and business — through that sub-account. Adding to his troubles, from 2006 through 2009 Mr. Gottesman supposedly didn’t file tax returns…while allegedly earning more than $400,000. According to the indictment, Mr. Gottesman had a CPA prepare tax returns; he just couldn’t be bothered to file them. That’s tax evasion. The indictment noted that Gottesman, “…created and began to use the Sub Account to deposit business income and to pay personal expenses after the 2002 Tax Lien due to his belief that the IRS could not levy the Gottesman [Attorney Trust Account].”

But the reason he likely got into trouble is something that I’ve mentioned over and over again: Withholding payroll taxes but not remitting them. If you do this, you will be investigated. The indictment states, “He [Gottesman] knew that he was required to pay payroll taxes to the IRS, but that he had not.” Given that he allegedly collected (withheld) taxes on his employees but didn’t remit them, that’s a huge mistake. That’s another 15 counts to go with the four counts of tax evasion.

I look at the press release and the indictment and have to wonder. An attorney knows (or should know) the rules regarding taxes. He apparently had good advice from a CPA. He practices in bankruptcy, so he knows that there are alternatives to simply not filing and paying taxes. Yet Mr. Gottesman allegedly committed numerous felonies–and apparently admitted doing so to investigators.

Willard Douglas Kerr of Phoenix operated DK Coatings, LLC, a painting and wall covering company in Manassas, Virginia. Mr. Kerr had many employees, and the business was apparently successful.

Mr. Kerr also had some pressing needs at home. He needed a new car. His swimming pool needed repairs. He also wanted to put more money into his business. So he did what you should never, ever do: He didn’t remit his federal trust fund taxes.

As I’ve said over and over, if you have employees and don’t remit your trust fund taxes, the IRS will come after you. It’s only a question of when, not if. If you’re an employer make sure you sign up for EFTPS and check to make sure that your trust fund taxes are being remitted; you will be held responsible if they’re not. That’s why you absolutely positively need to use a reputable payroll company. But I digress….

As I’ve said repeatedly, if you want to get in trouble with the IRS simply don’t remit payroll taxes that have been withheld to the government. You are certain to be investigated, and if any wrongdoing is found the investigation will quickly turn into a criminal probe. This story is about a rather

Nasheba Necia Hunte and Elmo Antonio George formed Winco Holdings Inc in Florida. George and Hunte were the only officers of Winco. They had no employees and paid no wages. Yet Winco filed employment tax returns for 2005-2007 showing substantial tax withholdings…withholdings that never happened. They even sent a rubber check for $1,676,991.16 to the IRS for Winco’s non-existent payroll tax obligations. The check was returned, “contact maker for authority to pay.”

The scheme gets more complex. The pair filed corporate tax returns for 2005 and 2006 that had phony partnership losses passing through to the owners as individuals. This generated refunds of $241,807. These funds were deposited into yet another entity, Dikingdom. The funds were used to buy a home in Georgia; George deeded the home to the “Overseer of Dikingdom” and claimed a church owned the property.

Ms. Hunte then made the not-so-brilliant decision to lie to investigators from IRS Criminal Investigation; she told them she wasn’t who she was. She also changed her address to a non-existent address.

If there’s been a constant theme in this blog, it’s that if you monkey around with payroll taxes bad things will happen to you. Unfortunately, Michael Cioffi of Loxhatchee, Florida isn’t a reader of this blog.

Mr. Cioffi operated a very successful lawn service; back in 2005-2006 he employed 30 individuals. Mr. Cioffi paid his employees but didn’t withhold any payroll taxes. Sooner or later an employee will file his own income tax return and the issue of social security will arise. If you want to get in trouble, Mr. Cioffi definitely went down the right path.

One of the recurring themes of this blog is that a business owner must pay his payroll taxes. The government considers Trust Fund taxes to be their money and they will always investigate payroll tax crimes.

Similarly, workers compensation is sometimes run through government and pseudo-government agencies. In California, there is the State Compensation Insurance Fund. The State Fund is a non-profit public-enterprise fund run like a mutual insurance company. However, it was created by the state of California. That makes it a pseudo-government agency. It’s a very bad idea to commit fraud against the government; it’s even worse to get caught.

George Osumi II has a construction business in Irvine. He apparently has his workers compensation insurance through State Fund. Mr. Osumi allegedly had a unique and, if proven, quite illegal method of lowering his insurance costs: He reported on his workers compensation report $3.5 million less in payroll than his actual payroll. That did allegedly save him several hundred thousand dollars in insurance costs. It’s also a felony. And since Mr. Osumi is alleged to have done underreported his wages 18 times, that’s 18 felony counts.

Adding to Mr. Osumi’s problems is that he is also alleged to have withheld state taxes and not remitted them. State tax agencies are just as certain to go after business owners as the IRS if you don’t remit withheld taxes. In total, Mr. Osumi faces 71 felony counts including perjury (he’s alleged to have lied to the State Contractor’s Board in stating that his business did not require workers compensation insurance), identity theft, and a host of state tax charges. Mr. Osumi is looking at up to 63 years in prison if found guilty on all the charges.